Strategic Export Promotion in the Absence of Government Precommitment
Arguments in favor of a strategic trade policy are based on the assumption that the government can credibly precommit to a policy that will not be altered, even if it is suboptimal ex post. This paper examines the implications of relaxing this assumption; to this end, a three-stage game is considered that accounts for the sunk costs associated with capacity installment. It is found that--contrary to common belief--the time-consistent optimal subsidy level is positive, though generally lower than the optimal level with precommitment. This somewhat counterintuitive result is driven by the commitment value of capacity. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
Volume (Year): 36 (1995)
Issue (Month): 2 (May)
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